Under the right circumstances the IRS will apply administrative procedures to override the general rule required by IRS 6402 to offset the refund of a taxpayer to satisfy an outstanding liability. This administrative process, known by the catchy name of offset bypass refund or OBR can provide significant assistance to a taxpayer struggling with a financial hardship. Even though not required to do so by the code, the IRS will step back from taking the refund and allow it to go to the taxpayer despite outstanding tax liabilities. While this is not the season for OBR activity at the IRS — the normal season is tax filing season, particularly the early part — this may provide the best time for a discussion of the topic since the season will be upon us shortly. When requesting an OBR, it is critical to know whether the client has other debts subject to offset since the client generally does not achieve the goal of OBR if they do not receive the refund due to other offsetting debts. This post will explain OBR: the procedures for making the request and the offset rules that can apply to thwart such a bypass.

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When someone owes federal taxes, section 6402 authorizes the IRS to offset a refund due to that person to pay for the outstanding balance. While governed by statute, the concept of an offset has ancient roots and provides a logical method for a creditor to recover a debt. Every year the clinic is contacted by taxpayers complaining that they did not receive their tax refund. When we obtain the transcript of their account, we can see that the IRS did allow the refund, but the refund was applied against an outstanding tax debt or, in some cases, against an outstanding debt owed to a third party authorized to receive a federal tax refund. When the IRS makes an offset to pay an outstanding federal tax debt, it notifies the taxpayer it has done so. This correspondence may not be sufficiently clear for some individuals or they may have changed their addresses and not received it. If the IRS applies 6402 to use the refund to pay a debt other than a federal tax debt, the taxpayer usually does not get a notice until September of the year the return is filed and that notice does not come from the IRS but from the Bureau of Fiscal Service described below.

Sometimes a taxpayer with past due federal tax obligations faces a severe financial hardship at the time of filing a return claiming a refund. The hardship may be a pending cut-off of electricity, eviction, foreclosure, need for heating oil, or other basic life needs. The taxpayer could use the tax refund to avert these crises, but the tax refund will not come to them because of the outstanding liability. In these circumstances, the IRS can override, or “bypass,” the offset and send the taxpayer the refund. In order to have the IRS override the refund, the taxpayer must contact the IRS and set up the bypass before filing the tax return. Failure to receive approval for a “bypass” before the posting date of the original return forecloses the opportunity to bypass the offset. See IRS Clarifies Procedures for Issuing Offset Bypass Refunds. If the tax refund has already been applied to the prior tax obligation, the IRS will not reverse the offset unless there was a clerical error. See IRM 3.17.79.3.21(5) (Note).

OBR is governed by IRM 21.4.6.5.11.1. In order to request an offset bypass refund, the taxpayer, or representative, should make the request when the return is filed. The request must occur prior to assessment. The request needs to demonstrate the financial hardship the taxpayer faces. The amount of the offset limits the amount of the OBR. For example, if the taxpayer would receive a $1,000 refund and the taxpayer demonstrates a $600 hardship in order to pay the rent and avoid eviction, the OBR will be $600 and not the entire amount of the refund available. The balance of the refund will go to pay the past due tax liability under the normal offset rules. Although the Taxpayer Advocate Service is usually associated with OBR the OBR need not go through TAS. If the IRS fails to make the properly requested OBR before assessment, the IRS can reverse the offset and pay the taxpayer the amount it would have paid based on the taxpayer’s demonstrated hardship.

Going back to the clinic’s case that I mentioned at the outset, we found that the client had not filed tax returns for the past few years. However, when a taxpayer requests the IRS to permit a collection process other than the one normally taken, the IRS generally requires that the taxpayer be compliant with their return filing obligations. The only broad exception to this rule is the hardship exception to having the account placed in currently not collectible status discussed in Vinatieri v. Commissioner. However, since we intended to file an Offer in Compromise for this particular client, we needed to prepare the old returns. These returns, if filed, would generate about a $1300 refund for the taxpayer. This refund amount was enough to satisfy the client’s federal tax obligation and eliminate the need for an offer in compromise. However, the client’s financial situation was so dire that we decided the best option for him involved submitting the returns, requesting an OBR and then submitting an OIC afterwards. This way, the client would both get the refund and clear his federal tax debt. However, in contacting TAS about using this procedure, we learned that the client had other outstanding debts subject to the Treasury Offset Procedure (TOP). These other debts prevented the IRS from granting the OBR since the IRS also forbids “bypasses” if the taxpayer also has a TOP debt (i.e., federal agency nontax debt, state income tax obligations, unemployment compensation debt, or child support). SeeIRM 3.17.79.3.21(2)(Note) and IRM 21.4.6.5.5.

We then needed to learn the nature and amount of the debts subject to the TOP offset in order to determine how to move forward with his case. We hoped that we would be able to resolve these debts before trying again for a “bypass.” The IRS transcript of account, which provides a picture of a taxpayer’s status for federal tax debts, does not show how much debt a taxpayer owes to the parties entitled to obtain an IRS refund through the procedures of 6402 nor does it identify those parties. To find out this information, you need another type of power of attorney, one for the Bureau of the Fiscal Service an agency of the Treasury Department. You can contact this Bureau via a toll free number 800-304-3107 but if you represent a taxpayer you need a signed Authorization for Release of Information from your client. Once you have the release form for the Bureau, you can contact it and find out what other parties have “dibs” on your client’s refund. However, the Bureau can only tell you identity of the other parties; it does not have any information regarding the amount owed or the reason for the debt. Each individual party would then need to be contacted to find out the specifics for the debt owed.

Our research led us to the conclusion that three other agencies had placed a marker on our client’s refund. One of the other parties was the state taxing authority. We thought we might be able to work with that debt to reduce or eliminate it through a state procedure. However, another one of the debts was child support and the amount of the debt was significant. Although there may be a mechanism for addressing past due (or way past due) child support, a quick consultation with a supervising attorney at the Legal Services Center of the clinic handling those types of cases convinced us that accomplishing a reduction of that debt would be very difficult and would place us way outside the comfort zone of our practice area. So, we concluded that a refund bypass would serve no purpose here. Because the refunds generated by the returns we had prepared would eliminate his federal tax liabilities, we returned to the simple plan of filing the returns and knocking one creditor off of his list.

Section 6402 creates a hierarchy of payment of refunds similar to the hierarchy for payment of unsecured claims in section 507 of the bankruptcy code. Refunds of federal taxes first go to satisfy federal tax debt. Only when that debt no longer exist, does money go to other parties entitled to receive the federal tax refund before the taxpayer. The statutory scheme in section 6402 first pays the refunds to the agency seeking money for child support. In that way, the Internal Revenue Code now also mirrors the bankruptcy code. If you look at the priority payment hierarchy of bankruptcy code 507, you see that the number one priority-unsecured-claim is child support and alimony. However, it was not always this way. In 1978 when the current bankruptcy code was passed, no priority was given to child support and alimony. “Deadbeat dads” filing bankruptcy generally discharged these unsecured claims with little or no payment. In 1994, when the first major bankruptcy reform act occurred with respect to the new bankruptcy code, child support and alimony made it into the code section creating priority claims but only as the seventh priority. In 2005, when the last major bankruptcy reform occurred, alimony and child support moved to the number one spot. It is interesting to see how this particular type of debt moved up over the course of one generation from an afterthought to the top priority. It is also interesting to note that it moved to the number one spot in section 6402. This says a lot about our social priorities and how they have changed.

If a taxpayer due a refund does not have the refund taken by the IRS or by a child support agency, then it must next pass the gauntlet of other federal debts. The statute does not list the federal debts able to be offset by the federal government but you can find it on Page 3 of this GAO Report. The one I see the most often is student loan debt. After federal debt, comes state debt. The list of state obligations varies by state. You can find a list here. Only after the IRS fails to find any debts from these lists does it send a taxpayer the requested refund. Anyone actually receiving the full amount of their refund should feel some sense of financial well-being vis-a-vis a broad spectrum of the government because it means they have a clean bill of health for many agencies.

Many times OBR will not help taxpayers in financial hardship because of their non-tax debts. This seems a little counterintuitive and counterproductive because the IRS is the senior creditor in this situation and it is generating the refund. As the senior creditor, it should have the ability to decide if the person has sufficient need for the refund and to send the refund even if other creditors exist lower in the 6402 queue. As a practical matter, convincing both the IRS and the other creditors, many of whom have a different process or no process for allowing the demonstration of hardship, is a task neither the taxpayer nor a representative can accomplish. So, the person with a hardship ends up fully paying or reducing their debt to the one party that would have waived this payment while the other parties who force the failure of the refund bypass still receive little or nothing on their debt. Perhaps the IRS should receive authority to speak for the queue.

You must go to the Department of Education (DOE) and work with whatever process DOE has for debt resolution in order to obtain your money. The IRS granted your refund and Financial Management Services (FMS), which is an agency of the Treasury Department and a clearinghouse for making payments for the federal government, sent your money to DOE because DOE certified to FMS that you had a qualifying debt. You want to have DOE remove that certification and, of course, return the money to you that was sent as a result of your 2016 tax return. The IRS has nothing to do with the resolution of this matter. If you feel incapable of dealing with DOE yourself, you need to find someone who specializes in student loan debt to assist you. You do not have a tax problem. In granting the refund, the IRS accepted your return.

Good insight on the hierarchy of debts. The challenge remains, for the practitioner, to be able to find out about all debts before the return in question is filed. Credit reports? Not enough to show child support or alimony debt.
Keep pluggin’!

One of the “preprinted” provisions of the standard offer in compromise is that the IRS will keep the refund, if any, for the year in which the offer was approved. Because the refund comes months, or sometimes even a year, later the retention of this refund comes as an unpleasant surprise to many who have received relief through an offer. The existence of this provision requires discussion and planning with the client at the time of acceptance to insure that withholding in the year of offer acceptance carefully matches the anticipated liability. If the client can claim the EITC or other refundable credits, it is usually not possible to adjust withholding in order to prevent a refund yet the money provided by the EITC refund could be critical to the financial success of the individual. Although I have never done it, I am told that it is possible to negotiate concerning this provision when entering into the offer. So, if you anticipate a big refund in the year of offer acceptance and if the refund will be critical to the financial success of the individuals obtaining the offer try at that point to negotiate out of the offer contract the provision allowing the IRS to offset the refund for the year of the offer. If you cannot do that or if it was not done, you can request offset bypass at the time you file the return for the year of offer acceptance but you are asking for something different than offset bypass under the IRS’ ability to waive offset under 6502 you are asking to reform the contract. I have never done this and do not know the chances of success. I expect the IRS would treat it similar to a regular bypass request but am unsure. Consult the IRM. Your comment suggests that the IRS has already taken the refund which means that the request may be too late.

My refund is currently offset due to defaulted student loans. I was out of work fo r a few years, and have been at my current job for 4 years. 2017 is the first year that I have tried to file for a refund since I had been offset. I am now in a loan rehabilitation program to get out of default. I still have 2014, 15, and 16 not yet filed. I understand that there is a 3 year statute of limitations on collecting past refunds. I am wondering if, after rehabilitation of my loans, my refunds prior to rehab are sill subject to collection for offset? Or will I be able to collect my past refunds?

I received an email from my HR about setting payment plan up with ECMC in order for my paycheck to be garnished. I did set the plan the Rehabilitation Program. “THEY” say that they have not turned it over to IRS for tax offset since I am now in the Rehabilitation Program in which I volunteered to do the automatic payment plan. The first payment is set to come out this week. I have called the Federal Treasury Offset number and the last time I checked there are no litigating offsets at that time on me. Can they still take my refund.

I just found out that i was in OFFSET status when i checked the status of my refund today.. I have no idea what that is an i have not received any letter stating anything about a tax refund offset.. but my status says its in offset but my refund should be in my bank 02/22/2018… so i am confused as to why its still saying im getting money and im confused as to why i never received a letter regarding the offset as the law requires? what can I do?

I’m in the same boat. DDD of 2/22/18. You won’t receive the notice until after the money has been sent to whomever the debt is being paid tooo. Mine is the department of education for defaulted student loans. Once you receive the notice stating why it was offset you may be able to call and request a review. It’s a long process but worth it if the decision is reversed. Extenuating circumstances must apply such as financial hardship. Its basically a waiting game at this point. It can be offset for student loans, taxes owed, child support, or any other federal debt.

Makena Miranda
Same thing happened to us it was approved 2/22 and be deposited to the account on 2/27 2018 my boyfriend did not for at least 8 years so now that he works I have him claim our son
To get a better refund .He is making payment before for DOJ but because we have hardships
that’s stop we lost our home pretty much we are close to homeless and renting a room in a relative house for $1200/ month with the 3 of us.$5950 that’s a good amount for us to get our own place or get a car for work but all that hope is gone .My son wanted to have his own room he is 14 years old and we are back in our feet,another’s bad part is let him claim our son so I have to pay taxes myself.It is really nice if someone can help us to recover that money and we are willing to pay the debt in installment like we used to do that they cannot
Takes our refunds. The state is the same thing please help.

Same here. Just found out my entire refund was taken. Not sure what to do as I cannot afford anything right now and was relying on this completely. I never received a letter either and didn’t even know about the loan being so defaulted until I checked my credit report. No clue what to do now….

Y’all I’m literally in the same page! I’m hoping there is a number where I can call for them to review because I never knew who my loans were through, or how much I owed. I just had a baby in September and I have been out of work since then! I was completely relying on this refund so i can put my almost 6 month old into daycare so I can go back to work to continue to pay towards them and support my daughter. This is the absolute worst feeling. And on top of that I can’t even get food stamps 😩

My refund was due to be deposited on 2/22/2018. Checked this past weekend 2/24/2018 and it was gone. 0.00 balance.. I called the treasury number and my money went to US dept. of Edu.. I have been making $5 auto payments since 8/03/2017. I called DOE and they reversed my offset. Said “our mistake” and Said I would have my whole refund, refunded. They told me to call back in 1-2 weeks. I wonder how the process goes?? Do they send my money back to the IRS to be reprocessed? Do they(DOE) deposit it into my bank? Do they(DOE) send a check? How long does it take?? Regardless, I’m glad I’m getting it back at some point. Single mom of 3 here!

I just lost $6723 over a payment plan of $25 a month that I forgot about but was never notified. I’m going to lose my house and I’m currently on food stamps and that is who took my money. Why not deduct from current beneifits. Is this legal?

My student loans were in default and I realized I may have an offset so I reconsolidated my loans, but not quickly enough for the Dept. Of Ed to remove the offset. The Dept. Of Ed. said they will refund me the offset by check through the mail, they said it can take 11-21 days for them to get the funds and then another 45 days to process the check, then up to 14 more days for me to get the check. That’s almost 3 months. I’m wondering if anyone else has gone through this and if it really took that long to get the check?

So did you just call the Department of Education for this? They also just offset mine, I had no idea I was in default. I was in good standing with American Education Services, big mistake on my part, but no one even tried notifying me. Plus Im eligible for a forgiveness!!!!

Same thing happened to me. I was paying through Navient i had no idea i owed another student loan company. I called around and found out before i got the notice so i spoke directly to the Dept of Education and she helped me consolidate and told me that the payment has not been applied to my account with them yet so she days for me to give it a few days and call them to see if they got everything they needed. She may be just yrying to get me ro consolidate but i was in tears on the phone with her when i found out i was getting nothing back, got a disabled daughter, and was foing to lose my home. She called back roday and explained i may still have time. For those of you that pray, i can use all i can get.

Im a single mother currently livibg in a shelter since february of last year. I work 55hours a week and have a 2year old and 4year old. Two years ago i found out my ex got foid stamps and cash under me for my two kids. Once it came up i was working full-time apparently they held a hearing and i was founded at fault for fraud for almost $4500 between cash and snap. Now im ineligible for any snap benefits and ive been sending $20 a month for the snap yet unable to pay the cash at tge same time… long story they offset my whole federal refund of $5,830 -$272 . I need to know how and if i can appeal this

When an offset occurs of your federal tax refund because of a claim filed with the Treasury Department by another federal or state agency, the only way to resolve the issue is by working with the agency that sent the claim to the Treasury Department. The IRS will not assist you in these cases. From the perspective of the IRS, it has granted the refund and the offset took place further downstream and out of its hands. If the agency making the claim to Treasury made it incorrectly, it should return the money to you though that process of getting the agency to return the money may be quite slow as described by Julie.

My taxes where taken as an offset to my student loan. I didn’t know I was in default. Is there a way or anything I can do to get it reversed because I’m close to losing my home and I was going to use my refund to pay my rent. As I stated I didn’t receive a notice or anything. I was getting my wages garnished at my old job. Switched job and asked for a form they never sent it. What is there I can do so I can get my tax refund. An I can still pay off the loan.

I too just lost my entire tax refund due to an offset forstudent loans. Mine were for itt which was closed in 2016. I withdrew from that school in 2013. I was under the impression the student loans were closed due to this school defrauding the students. When i seen i might have an offset i seen that 2 of the 6 loans were not closed. I’m waiting on the letter from the depart of education so i can call them and see if i can have this reversed. I’m still confused as to why after 5 years they just now decided to do the offset. Single mom of 3, We kinda look forward to our taxes to help get caught up and maybe buy things we need that we can’t afford throughout the year. Hoping i can have this reversed. Anyone else have this issue with a school that has been closed and have any kind of good results that helps me with some kind of hope i can still have themrefund my taxes back?

Today we put up a post written by the director and another attorney working on the Project for Predatory Student Lending. For readers experiencing offset by the Department of Education, please go to that post.

My Federal refund was taken due to an offset which I knew nothing About. I thought I was done with the portion of the debt because they took my whole refund back in 2016.Now Im struggling trying to pay bills and only make 7.25 no car or nothing and barely have bus fair.I was really depending on that refund please help me. I just need to catch up on bills and my dependants needs and so forth.

I currently have outstanding student loans. I filed my taxes and they offset it. My husband & I are in an active bankruptcy. Luckily I filed taxes after we filed bankruptcy. They asked me when we filed Chapter 13 and that I needed to send over proof. I did so right away and it was approved! They just requested the refund thru the IRS and said I should be receiving a check in the mail within 8 wks.

I had student loans in default due to my ex husband only paying his bills, not mine. Well I got that all cleared up and was told “your taxes will no longer be offset”…. guess what?? They were offset!! After calling around and receiving letters, I have been informed that I will be receiving the money, however, it will just “take time”. Does anyone know how long it takes to receive your tax return once this happens??

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Leslie Book

Keith Fogg

T. Keith Fogg is a Clinical Professor of Law at Harvard Law School where he started a tax clinic in 2015. Prior to joining the faculty at Harvard, he began his academic career at Villanova Law School in 2007 after working for over 30 years with the Office of Chief Counsel, IRS. Read More…

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